Perfect Timing

A convergence of market forces means now is the best time to build or renovate. Find out why and how to use the data to get your project funded.

BUILDING BUBBLESHere is a graphic representation of
the total interest cost for a $3.5 million construction project
over the life of a 20-year bond. It has been more than 40 years
since costs were this low. Current interest rates might drop even
lower.

When it comes to renovation, today’s aquatics facilities are
in a bind. Many are in desperate need of rebuilding or renovation.
But coming up with the money is more difficult than ever for
most.

One way to loosen the purse strings is to show voters or budget
makers that now is the best time in 45 years to build a new,
renovated or replacement municipal swimming pool facility.

That’s due to a rare convergence of two key money-saving
trends.

First, interest rates on municipal bonds are the lowest they have
been since April 1967. Second, construction costs are as low as we
have seen in the past 10 years.

Taken together, these two forces mean that if a municipality needs
to build a new, renovated or replacement aquatics facility at any
time over the next 10 or 15 years, it should act now. This brief
window of opportunity to finance such improvements at the lowest
possible cost is here today, but if history repeats itself —
as it almost always does — it likely will not occur again
within the next 30 to 50 years.

The financial benefit will be dramatic. Communities that wait and
are forced to make such improvements when costs rise again probably
will regret missing out on this historic opportunity.

A look at 20-year municipal bond interest rates over time indicates
historically sharp increases soon after periods of low interest
rates, as exists today. Experiencing interest rates lower than
today is highly unlikely because the Federal Reserve borrowing rate
for banks is effectively nothing, and the bond markets have aligned
as low as practical to this rock-bottom rate.

The 20-year municipal bond rate in August was 2.53 percent. The
only comparable time in history was April 1967, when the rate was
3.6 percent, according to economagic.com.

Using historical interest rates, if an aquatics facility had been
renovated or constructed with a 20-year municipal bond and an
initial project cost of $3.5 million in April 1967 (when the
interest rate was 3.6 percent) instead of April 1968 (when the
interest rate was 4.34 percent), a savings of $337,661 would have
been realized over the life of the bond. If the same facility were
constructed in February 1982 (when the interest rate was 12.97
percent) instead of April 1967, the project would have cost $5.1
million more over the life of the bond.

So what can we expect from interest rates going forward? It is
anticipated by most financial forecasters that interest rates will
begin to rise significantly soon.

The most important factor that influences interest rates is
inflation. As the U.S. economy continues to move forward out of the
current recession, there will be more pressure on prices due to
increased demand. To counter inflationary pressures, the Federal
Reserve always raises interest rates. Once the Fed rates start to
rise and investors require higher overall rates of return as a
result, all other bond rates will follow suit, including municipal
bonds. When this trend starts, cities that did not act when rates
were low (that is, now) will be forced to pay higher costs.

In addition to lower funding costs for aquatic projects, an
analysis of construction costs reveals a similar cost savings
trend. We found that the rising construction cost trend between
2003 and 2009 typically resulted in a 25 percent total increase in
construction costs over this time period. After 2009, however, we
noticed a decrease in overall construction cost trends. In fact,
today’s aquatics industry construction costs for renovation
or new construction are very similar to those of 2003.

After discussing this downward trend with contractors in the
aquatics industry, we found that the decreases were not necessarily
in the cost of the products placed on the job, but were mostly
related to the decrease in profit margins for the contractors and
equipment manufacturers. In other words, while many raw material
prices increased somewhat, most of the companies involved with
refining raw goods into finished construction were deriving very
little profit for their efforts.

This is most definitely a trend that will reverse itself as our
economy improves and demand for construction rises again. Only
municipalities that act now will reap the benefits of this trend
and, at the same time, help improve our overall economy by
strengthening the construction work force. So as you can see,
there’s a “perfect storm” of price factors that
make building a new or renovated aquatics facility today as
inexpensive as it probably ever will be. Municipalities that take
advantage of these cost savings now, instead of waiting and being
forced to act when prices are significantly higher, will be part of
the wise elite.